Rotation Out of Mega-Cap U.S. Stocks Could Provide Tailwind for Cryptocurrencies, Marex Solutions Says

Wall Street investors are moving into small-cap stocks and out of mega-cap companies as inflation eases and expectations for a Fed rate cut strengthen.

Sector rotation could lead to greater capital allocation in the cryptocurrency market, according to Ilan Solot of Marex Solutions

Wall Street’s shift toward small-cap stocks at the expense of mega-caps could fuel gains in the cryptocurrency market, Marex Solutions told CoinDesk on Wednesday.

Since July 8, the Nasdaq, Wall Street’s tech-heavy index of 100 stocks, has traded little changed around 2,270 points, including the so-called Magnificent Seven (Mag 7) of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. Meanwhile, the Russell 2000, a small-cap index, has gained more than 12%, according to charting platform TradingView.

That’s a sign that investors are pulling money out of the biggest tech companies and putting it into smaller companies that have been lagging the broader market until recently. The Wall Street Journal attributes the newfound love for small companies to easing inflation and growing confidence that the Federal Reserve will lower benchmark borrowing costs this year.

According to Ilan Solot, senior global strategist at Marex Solutions, a division of global financial platform Marex that specializes in creating and distributing customized derivatives products, sector rotation could be the most important macroeconomic factor for cryptocurrencies.

“As the steam comes out of Mag 7, the currency will look for other places to deploy. Small caps are reacting unbridled, but I think crypto will benefit from this rotation,” Solot said in an interview.

Solot’s perspective contradicts the perception prevalent in the cryptocurrency market that valuations of digital assets are determined solely by trends on the Nasdaq.

Institutions and traditional investors may have already started allocating money to crypto, as evidenced by renewed demand for spot bitcoin {{BTC}} exchange-traded funds (ETFs) listed in the U.S. The 11 funds recorded cumulative net inflows of $422.5 million on Tuesday, the most in six weeks. Total inflows over the past three days were over $1 billion.

According to Solot, the sector rotation could be particularly favorable for the launch of Ethereum’s native token ether {{ETH}} and the upcoming spot ETH ETFs.

“An ETH ETF could be perfect timing at a time when AI technology investors are looking for alternative themes,” Solot said.

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